Reflections: Venturing into a New Frontier
It was about one year ago when I started the blog. Emerging markets investing is my passion, and I have written several books and contributed to magazines and newspapers on the topic, both now and in the past. These grew mainly out of my desire to introduce investors to the exciting and rewarding realm of emerging markets.
Blogging has given me a new avenue for sharing my thoughts and perspectives on emerging markets, on a more regular basis and to potentially new audiences. While social media in all its forms is one of the most popular and fastest growing arenas on the web today, it is still considered a ‘frontier market’ for many, especially in the corporate world. As a frontier market investor, I was very happy to give it a try, and have found the experience very rewarding, especially in reviewing all of the readers’ comments!
Going back to the concept of frontier markets – be it investing or entering a new field, I believe that the better one appreciates the inherent risks in the ventures, the better one would be able to potentially benefit from the upside and avoid the danger areas.
Over the years, investors have grown more open to investing in emerging markets like Brazil, China and India. However, there continues to be some misperceptions about investing in frontier markets.
In general, frontier markets are defined as the ‘next’ emerging markets. The economies are more domestic-oriented with a limited number of publicly listed companies; hence, frontier market investments tend to be primarily limited to private equity. A frequent concern quoted by investors is about the quality of the company management. Frontier market investing often requires additional time and due diligence to assess the quality of the management team including more frequent on site visits to evaluate the business effectively. That said, whether in Nigeria, Kenya or Vietnam, we have found that more and more companies are led by a management team that has been educated in the West at academic institutions like a Harvard or London School of Economics.
When I look back at some of the markets in which we have invested, I’m amazed by the progress that has been made. When I first went to Istanbul, Turkey to visit the stock exchange, it was in an ancient building in the old downtown area of the city. Trading was taking place in a meeting room for a few hours each day with the stock exchange president calling out names of each company in order and the audience of stock brokers giving their bids to buy or sell. Obviously, turnover was very small and the atmosphere was languid with just a handful of stocks being traded. Today, Turkey’s stock exchange is housed in a big modern building where computerized trading averages US$1.1 billion daily among 330 listed stocks with a total market capitalization of US$276 billion.
Another frontier region which is very interesting is Africa. With its abundance of natural resources like oil, gold, silver, copper and steel and its large untapped consumer base, it is an exciting region to be in. Negative news about the region in general has put investors off and it is a heavily under-researched region, which gives us an opportunity to look for hidden gems.
Some investors raised the concerns that frontier markets are dominated by finance, telecommunications, energy and industrials companies, which lack diversification and these sectors tend to be more closely correlated to the global economy.
The initial availability of natural resources and energy first attracts foreign investors. As a country develops, building up its domestic infrastructure is a natural progression, and basic services such as banking, telecommunications and transportation are required to support the economy and the populace. The banks in the frontier markets such as Nigeria, Jordan, Qatar and Vietnam are in relatively good health with low loan to deposit ratios, as they are not as sophisticated as the developed Western banks. Be it the banks or the telecommunications companies, they are looking to penetrate an under-served population, which is where the growth potential and opportunities lie.
In an introduction that the late Sir John Templeton wrote for one of my books in 1996, he noted “People don’t think about problems in the context of history. They think that today’s worries will always be there and that existing conditions can’t change. I encourage people to try to foresee the future by considering the dramatic changes we have seen already. Emerging market investing as a frontier sport has made way for international investing, the search for bargains.” While I still see social media as a “frontier market” in the corporate arena, I can certainly envision its fast changing future and I am looking forward to continuing this journey of sharing my ongoing adventures, in emerging markets and beyond.
 Source for market data: World Exchange Federation as of end August 2010.